The 112th Congress convenes

Jan 6th 2011 | WASHINGTON, DC | from PRINT EDITION

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THE first act of the new Republican majority in the House of Representatives, which took control of the chamber this week after four years of Democratic rule, was to order the constitution to be read aloud on the House floor. This crash course in civics was intended chiefly as a gesture of fealty to the tea-party activists, or “constitutional conservatives”, who helped propel the Republicans to power in November’s election. But the reading also serves as a stark reminder of the many celebrated “checks and balances” built into America’s political system, and thus how hard it will be for the new regime to get anything done.
Take another of the Republicans’ first acts: the scheduling of a vote on January 12th to repeal the health-care reforms passed by the previous, Democrat-controlled Congress. The measure is all but certain to pass, given the Republicans’ healthy majority of 242-193, and may even attract the votes of a few Democrats. But it is also all but certain to run aground in the Senate, which remains tilted 53-47 in the Democrats’ favour. A further obstacle to the ambitions of the House Republicans is the president’s power to veto any bill he dislikes. As their recent primer on the constitution will have reminded them, it takes a two-thirds vote of both chambers—something far beyond the Republicans’ reach—to overturn a presidential veto.
Thus most of the measures with which the Republicans are marking their ascendancy are symbolic. In another sop to the tea-partiers, they have drawn up new rules requiring every bill to specify the precise passage of the constitution that empowers Congress to act on the matter at hand. In a jab at the unions, they have changed the name of what used to be the Committee on Education and Labour to the Committee on Education and the Workforce. And to embarrass the president, Darrell Issa, the new chairman of the Committee on Oversight, has announced no fewer than six investigations he plans to conduct, into suspected incompetence at various government agencies and the like.
In a show of their determination to cut spending, the Republicans plan to vote in their first week to trim the House’s own budget by 5%. They have also changed House rules to ensure that all increases in spending are offset by commensurate cuts, rather than increases in tax. In fact, it is in fiscal matters that the Republicans will have the most leverage. Their support will be needed in the coming months both to pass a budget and to raise the legal limit on America’s debt. The stakes are high: failure to agree on the former would prompt the government to suspend all but its most basic functions; neglecting the latter would entail defaulting on America’s debts.
Republican leaders say they want to avoid any such cataclysms, but are also insisting on cuts. Paul Ryan, the new chairman of the House Budget Committee, maintains that he will pare back non-security spending in what remains of the current fiscal year to the level of 2008. That would mean a cut of roughly 20% or about $50 billion, a drop in the ocean. That is broadly consistent with the Republicans’ pre-election promises, but is considered far too severe by the Democrats in the Senate, the president and milder Republicans.
By the same token, many of the Republicans’ fiercest deficit hawks say they will not allow the debt ceiling to be raised unless they secure swingeing budget cuts. The Republican leadership appear worried that an unseemly zeal to slash spending and precipitate a melodramatic showdown with the Democrats would alienate moderate voters at the general election next year. But they also tend to bow to the zealots in the party who agitate feverishly—and often successfully—to unseat in the primaries anyone without a similar gleam in their eyes. Just how these impasses will be resolved, and with what amount of brinkmanship, is anyone’s guess.
Barack Obama, for one, seems to assume that the Republicans will indulge in a spell of futile pandering to their base before compromising on the budget and perhaps a few other matters. “That’s what happens in Washington,” he said breezily this week, on his way back from a holiday in Hawaii. Some observers see scope for bipartisanship on trade deals or an overhaul of immigration laws, although that would depend, presumably, on how poisonous the negotiations over the budget become.
A good indicator of Congress’s likely descent into bickering and stalemate is the sudden interest in both chambers in the rules of procedure. John Boehner, the new speaker of the House, has resorted to a procedural gimmick to try to impose spending cuts until a new budget is passed. He has also instituted new rules intended to rein in the deficit, but has exempted from them some of the Republicans’ most cherished but expensive goals, such as further extending the temporary tax cuts agreed with the Democrats last month.
In the Senate, meanwhile, Democrats are threatening to make it harder for the Republican minority to obstruct the will of the majority. As soon as the chamber convened on January 5th, Tom Udall, a Democrat from New Mexico, put forward a motion to change the rules of the filibuster, whereby 41 of the 100 senators can stymie almost any measure. Normally, such a change would require the approval of two-thirds of senators. But on one interpretation of procedure the rules can be changed by a simple majority of senators at the beginning of a new Congress.
Republican senators complain that the Democrats, having lost the election, are now trying to subvert its result. Somewhat contradictorily, they are decrying the attack on the Senate’s traditions even as they threaten similar acts of vengeance should they win control of the chamber at the next election. Resorting to yet another procedural ruse, Harry Reid, the leader of the Democratic majority, has deferred the matter for a few weeks in the hope of striking some sort of deal with the Republicans. Even if the Democrats in the Senate get their way, however, they will be just as constrained by America’s newly divided government as the Republicans.

Blame and shame

A chronicle of deaths that should have been foretold

The Deepwater Horizon report

TONY HAYWARD, BP’s chief executive when the Deepwater Horizon rig caught fire and sank in April 2010, famously remarked that, “To put it simply, there was a bad cement job.” The report of the National Oil Spill Commission set up by Barack Obama to look into the loss of the rig and the subsequent massive oil spill, a portion of which was released on January 6th, differs subtly but crucially. The fundamental problem was not the dodgy cementing: it was BP’s failure to exercise proper caution before relying on that cementing.
As previous analyses of the accident, including BP’s own, have shown, the flawed cementing that let oil into the bottom of the supposedly sealed well was not the only issue. Subsequent portents were missed, procedures altered and tests muffed which should have saved the rig. Where the new report stands out is in showing how options that would have reduced the risk, like thorough cement testing, were systematically forgone in favour of cheaper alternatives without due consideration.
BP bears the brunt of the report’s stinging criticism, but not all of it. The report says that tests by Halliburton, contracted to do the cementing, showed the cement being used was unlikely to set stably and effectively in the well; but Halliburton did not communicate that conclusion, or, it seems, all of the results, to BP. Transocean, which owned and ran the rig, failed to give anything like enough weight to the lessons of an “eerily similar” accident on one of its rigs in the North Sea the year before, which was only just kept under control.
The criticism of Transocean and Halliburton is not just a problem for those American companies; it is the foundation of the report’s assertion that the oil industry has a systemic problem. As the commission’s co-chair, William Reilly, has pointed out, there are oil companies with exemplary safety records. BP might just have been a bad egg. But the fact that all three of the companies working on the Deepwater Horizon made fatal errors in their management and communications indicates that there is much to be fixed in the attitudes and practices of the industry as a whole. These broader issues, and what the government might now do about them, are sure to make up much of the meat of the rest of the report, due for release next week.

Is Facebook really worth $50 billion?

And will its new financing scheme fall foul of regulators?

IN 2009 Rolling Stone described Goldman Sachs, an investment bank, as “a great vampire squid” that likes to stick its “blood funnel” into anything that can make it money. This week the squid inked yet another high-profile deal. Together with Digital Sky Technologies (DST), a Russian group, Goldman invested a total of $500m in Facebook, valuing the world’s most popular social network at a whopping $50 billion. The bank is also planning to set up a fund it will manage that will pump up to $1.5 billion more from wealthy investors into the company.
For Facebook, the deal provides a mountain of extra cash to invest in things such as new data centres and acquisitions. It gives it fuel for further growth without the hassle of listing its shares. For Goldman, the transaction represents an opportunity to stick its “funnel” into an internet firm that makes investors drool. As well as benefiting from any further appreciation in Facebook’s value, the bank plans to suck up fees for managing the new fund. And it is no doubt hoping that by cosying up to Facebook’s top brass it is boosting its chances of leading an eventual initial public offering (IPO) of the company’s stock.

News of the deal has sparked vigorous debate. Facebook’s implicit value has risen fivefold since mid-2009, but sceptics doubt that a firm whose business model is unproven is worth more than established media giants such as Time Warner (see chart).
Since Facebook is not obliged to divulge financial information, it is hard to know for certain whether Goldman and DST, which already owned a sizeable chunk of Facebook stock, are overpaying. But Facebook bulls argue that the network’s sheer scale is proving irresistible to advertisers. Debra Aho Williamson of eMarketer, a research firm, notes that Facebook has even begun to attract notoriously conservative—and deep-pocketed—advertisers such as Procter & Gamble.
The company is also starting to look more and more like a natural monopoly. MySpace, which used to dominate the social-networking arena, has come to look like My Empty Space. It is rumoured to be about to make yet more cuts to its workforce. And networking upstarts such as Twitter, which has also seen its valuation soar (to $3.7 billion), have revenues that are a mere fraction of Facebook’s, which are said to have hit $2 billion last year.
Still, at $50 billion Facebook looks rather expensive. If its sales really are $2 billion a year, that implies that Goldman and DST are paying 25 times current revenues for their shares. That would be a breathtakingly steep multiple, even by the giddy standards of the start-up world.
Squid’s in
Moreover, Facebook has nowhere near as robust an advertising model as, say, Google, whose search-related ads are served up to users when they are often on the point of making a purchase. Much of Facebook’s revenue comes from low-end display advertising. And though it will benefit from marketers’ growing interest in word-of-mouth promotion, the company will have to scrap for those dollars with traditional media brands, whose rich content makes them attractive venues for social-media advertising too.
In spite of this, investors are still falling over one another to get their hands on Facebook’s shares—and Goldman is keen to help them, so long as they agree to abide by certain rules. Clients considering signing up to its proposed Facebook fund are reportedly being asked to commit at least $2m each to it and to hold on to any shares they receive until at least 2013.
A different problem for Facebook and Goldman is that Goldman’s planned fund could fall foul of the Securities and Exchange Commission (SEC). On January 3rd SecondMarket, a broker-dealer in private-company shares, said it had been asked by the SEC for data about pooled investment funds formed to buy private-company stock—precisely the kind of vehicle that Goldman has in mind for would-be Facebook investors.
In recent months several other financial institutions have formed similar special-purpose vehicles that invest in private companies’ stock, piquing the SEC’s interest. This has prompted predictions that regulators may end up treating such entities not as a single shareholder, but as a collection of individual investors. That would have important implications for the companies in which they invest. An SEC rule requires private firms with 500 or more shareholders of record in a given type of stock to publish quarterly accounts and audited financial statements. Faced with such obligations, most firms seek a public listing. This rule was one of the reasons that Google ultimately decided to go public in 2004.
Having to go public now would be a nightmare for Facebook and Mark Zuckerberg, its founder and chief executive, who is said to be keen to put off an IPO for as long as possible. The firm reportedly had fewer than 500 shareholders at the end of last year, including employees and venture capitalists, so it is no doubt hoping to avoid having its arm twisted.
Facebook and Goldman seem to have the letter of the law on their side. Joseph Grundfest, a professor at Stanford Law School and a former SEC commissioner, points out that the rule in question states very clearly that a fund such as the one Goldman has in mind should be treated as a single shareholder. “If someone says Goldman is violating the law, then they obviously don’t know the law,” he says. Were regulators to interpret the rule in any other way, it would have far-reaching consequences for, say, the venture-capital industry, in which funds with multiple investors routinely take stakes in private firms.
However, some observers say that the SEC may be tempted to conclude that the new breed of special-purpose vehicles being created by the likes of Goldman have been set up specifically to get around the 500-shareholder rule. They have the potential to include a much wider range of investors than a typical venture fund, and may attract heightened scrutiny.
Regulators have a duty to protect investors and weigh the concerns of companies that wish to remain private. It is a delicate balancing act. But anyone who invests in a market this frothy must surely realise it is also risky. Meanwhile, Goldman and the other banks which hope to turn these vehicles into a big business should consider friending some good lawyers.

Crazy sexy stupid

FAMILY planning and birth control is one of many areas where America has gotten itself wrapped up in a decades-long hysterical moralistic argument over issues whose solutions ought to be obvious to any mature adult. It's rather silly that we're still arguing over problems that were really settled by about 1977, but there you are. Anyway, Andrew Sullivan argued the other day that since abortion has dramatically curtailed the number of adoptions,

If the pro-life movement dedicated its every moment not to criminalizing abortion but to expanding adoption opportunities, it would win many more converts.

Megan McArdle sensibly responds that this doesn't really make any sense. Demand for adoptible American babies vastly exceeds supply precisely because abortion has cut down the supply; there's no shortage of opportunities for pregnant mothers who want to give up their babies. However, she then sweeps birth control into her argument in a fashion that's very far wide of the mark.

I don't think it makes much sense to argue that pro-lifers ought to focus their energy on preventing pregnancy through better birth control distribution, or facilitating adoptions.  The means to (almost always when used correctly) prevent pregnancy is quite widely distributed through our nation's drugstores, and adoptions are quite well facilitated through the current network of adoption agencies. Yet nonetheless, one in five pregnancies ends in an abortion.

Adoption is one thing. Birth control is a whole different kettle of fish. It's true that birth control is reasonably widely available in American drug stores. But the rate of usage of birth control is much lower in the United States than in Western Europe and the rest of the developed world. Hence, unsurprisingly, America's rates of teen pregnancy and unwanted pregnancy are much higher than in most other developed countries, as is America's rate of abortion. Rachael Phelps had a pretty great photo essay about this in Slate back in October. The average age of sexual debut in America and Europe, she noted, is the same: 17. But America's teen pregnancy rate is three to six times higher than Western European rates. And our abortion rate is about three times as high as that of Germany or the Netherlands and about double that of France. Ms Phelps describes how European public-health campaigns encouraging contraceptive use dovetail with national attitudes towards sexuality that treat it as less of a dangerous conflagration and more of a natural part of development. Here's one arresting figure, showing birth control use at sexual debut for teenagers in the Netherlands and the United States:
The first time they had sex, 64% of Dutch teens used hormonal birth control, ie the pill, Norplant, etc. Almost half used both hormonal birth control and a condom, which is what Dutch public-health authorities recommend. Just 26% of American teens were on hormonal birth control the first time they had sex. That may be related to the fact that 70% of American school health clinics are prohibited from distributing condoms or any other form of birth control.
Stating that a technology known to prevent a condition is widely available is not an adequate or moral public-health response. Conservatives believe this just as strongly as liberals do. After all, the technology needed to not have sex at all is widely available on everybody's body; it's called keeping your pants zipped. Yet conservatives have allocated billions of government dollars to attempts to persuade teenagers to use this technology, attempts which apparently have no public-health effectiveness whatsoever, given that the age of sexual debut remains the same in the United States and Europe.
I don't think it's true that the pro-life movement would gain any converts among liberals by dedicating itself to increasing adoptions (even more than it already has), even if adoptions weren't already widely available. But I do think that the pro-life movement would gain itself a lot of political allies if it were to dedicate itself to dramatically increasing usage of contraceptives among American teenagers. That, obviously, is never going to happen, because a plurality of the pro-life movement actively opposes teenagers using birth control, due to a number of false and superstitious beliefs about teen sexuality that are unfortunately deeply rooted in American culture.

Growth of OECD economies slows in Q3

Agence France-Presse . Paris

Leading world economies grew for the sixth quarter in a row in the three months to September, but expansion slowed down sharply from the second quarter, an OECD indicator showed on Monday.
But OECD economies showed growth of 3.1 per cent from the level in the third quarter of last year.
This figure of expansion over 12 months was the same as in the second quarter.
In the third quarter of this year, output by the 33 countries in the Organisation for Economic Cooperation and Development grew by 0.6 per cent in after growth of 0.9 per cent in the second quarter.
‘Growth rates accelerated in Japan (to 0.9 per cent) and, marginally, in the United States (0.5 per cent), compared to the previous quarter, ‘ the organisation said.
The economies of the 16-nation eurozone and of the 27-member European Union each grew by 0.4 per cent, down from 1.0 per cent in the second quarter.
‘At 0.7 per cent, growth in Germany remained relatively robust but this was still sharply down on the record 2.3 per cent growth recorded in the previous quarter,’ the OECD said.
Growth of output also slowed in France to 0.4 per cent, Italy 0.2 per cent and Britain 0.8 per cent.

EU, IMF okay 3rd payment of Greek funds

Agence France-Presse . Athens

EU and IMF auditors approved on Tuesday the payment of a third slice of rescue funds for Greece but said the debt-stricken country had to make an extra effort to merit a fourth in February.
The auditors, speaking after a review Greek public finances following a 110-billion-euro ($150 billion) May rescue, did not rule out extending the repayment timetable nor providing a further loan to Athens.
Asked whether the May package could be extended, Poul Thomsen of the International Monetary Fund noted that the initial loan was for a relatively short time and that Greece should in due course be able to return to the markets to borrow funds.
However, there were various options for dealing with the repayment issue, Thomsen said, adding: ‘We have options of allowing longer repayment periods or to give a follow up loan.’

Luxury holiday lure for British energy savers

Agence France-Presse . London

Britons who take out loans to insulate their houses will be rewarded by being entered into competitions to win luxury holidays, the energy and climate change secretary said Tuesday.
Chris Huhne told The Times newspaper that as well as receiving reductions on their gas and tax bills, people participating in the government scheme would be given the opportunity to win holidays in the Norwegian fjords.
‘We will legislate to allow the energy companies to incentivise owner-occupiers,’ Huhne said. ‘If they want to offer the chance of a cruise for two to the Norwegian fjords that’s something they can do.’
The Department of Energy and Climate Change says that lack of insulation and double glazing has resulted in an estimated 16 million energy-inefficient homes in Britain.